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Top Questions Business Owners Ask Before Forming an LLC

Get quick answers to 12 frequently asked questions about LLC members, benefits, taxes and more

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Millions of small businesses are registered in the U.S. each year, and every owner has to make the same important decision:
Which business entity type is right for me?

Incorporating as a limited liability company is one option. Here at MaxFilings, we regularly get questions about what an LLC is exactly and if it's the best choice for all businesses. Continue reading to see answers to the most commonly asked questions about this popular business entity type.

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1. What is a Limited Liability Company (LLC)?

A Limited Liability Company (LLC) is a business entity formed by filing Articles of Organization with the appropriate state. An operating agreement doesn't have to be filed, but it's an important document that should set forth the rights and responsibilities of the owners (members), their share of ownership, their voting rights, their shares of profits and losses, and their distribution rights — all of which can be different and without regard to their capital contribution.

As the name implies, an LLC provides the same “limited liability” for its members as a corporation does for its shareholders. Members aren't liable for the debts, obligations, and liabilities incurred by the business, or for liability stemming from possible legal action. Normally, members cannot lose more than the amount they invested in the LLC. If the LLC goes bankrupt, the members will not be liable for business debts.

Should someone sue the LLC and it's found liable, they can take the business's property to satisfy the judgment. But if that property doesn't satisfy the judgment, they will not be able to take a member's personal assets (i.e. home, car, bank account, etc.). Protection of members' personal assets is a major advantage of an LLC.

The only time a member's limited liability doesn't protect them is if the corporation has recklessly harmed people or has been used to perpetuate a fraud.

An LLC can choose to be taxed as a corporation or opt for the pass-through tax structure of an S corporation. Depending upon the tax method selected, an LLC is just like a corporation, but without the formal structure and cumbersome requirements.

Since an LLC offers the same advantages as a corporation while being much more flexible, and is easier and less complicated to operate, it has become an obvious best choice for many small businesses.

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2. How is an LLC structured?

A limited liability company is owned by its members. An operating agreement sets forth the members' rights and responsibilities. Unlike shareholders of a corporation, an LLC member's share of ownership, voting rights, profits, losses, and distribution rights don't have to be based on the amount of their contribution to the business.

Normally, one or more managers make management decisions and “run the business” for a majority of the inactive members.

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3. What are the advantages of LLCs?

  • Most states permit LLCs to also file an operating agreement that allows for great flexibility in setting forth the relationships between its members and its internal operations.

  • An LLC can be managed by its members or by managers.

  • Legally, an LLC is a separate entity from its members and managers.

  • An LLC can generally conduct any lawful business.

  • Most states permit one member LLCs and no states limit the number of members.

  • Corporations, partnerships, and trusts can be members of an LLC.

  • Most states permit the free transferability of interests in LLCs.

  • There are fewer required formal reports and less paperwork for LLCs than for corporations.

  • Members and managers normally enjoy the same limited liability as the shareholders, directors, and officers of a corporation, meaning they can lose no more than the amount of their contribution to the LLC.

  • Most states don't require any meetings of LLC members.

  • An LLC can choose to be taxed as a corporation or opt for the pass-through tax structure of an S corporation.

  • Members of an LLC can be divided into as many classes as desired, without regard to their capital contribution. Each class can have different voting rights, shares of profits and losses, and distribution rights.

  • Employees would frequently rather work for an LLC than for a sole proprietorship or partnership.

  • The general public considers LLCs as being more substantial than sole proprietorships and partnerships.

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4. What are the disadvantages of LLCs?

  • Official documents (typically called a Certificate of Formation or Articles of Organization) must be filed with the appropriate state government office.

  • State filing fees must be paid.

  • LLCs require more paperwork and documentation than sole proprietorships and partnerships.

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5. Do I need an attorney to form an LLC?

Not necessarily. Formation of an LLC is primarily a clerical process. While it can be relatively complex, anyone who understands and follows the required procedures can form an LLC.

At MaxFilings, we provide this formation service for substantially less than the amount charged by most attorneys. While we guarantee the accurate formation of a business, our service isn't intended to serve as a substitute for professional legal advice. Since individual situations and state statutes can vary, you may need to seek more detailed advice from a local professional who is familiar with your specific requirements as well as those of the state in question.

Since taxes are a prime consideration when forming an LLC, we do recommend consulting with your accountant or tax advisor.

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6. How many members can LLCs have?

Most states permit one member LLCs. No states limit the number of members, meaning you can have as many as you want.

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7. How is an LLC managed?

An LLC can be managed by its members or by designated managers.

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8. What is a registered agent and must I have one?

Yes, all LLCs are required to have a registered agent. A registered agent is a professional who is registered with the state of incorporation and who is authorized to receive legal papers on behalf of your business. They are normally listed with the Secretary of State and must be located in that state as well as available during normal business hours.

While anyone can serve as your business's registered agent, most owners choose to hire a professional registered agent since it's extremely important that all legal paperwork, tax documents, annual reports, and correspondence with the state and regulatory agencies be handled promptly and efficiently.

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9. What is a Limited Liability Company (LLC) Kit?

An LLC Kit consists of a number of things that will help you comply with all state rules and regulations regarding documentation and record keeping. While the strict regulations states apply to corporations don't apply to LLCs, we strongly recommend you hold periodic meetings and maintain accurate records. Membership certificates must be issued to LLC members and a record of the owners must be maintained. A metal seal is used to make an official impression identifying the company on official documents.

Find out more about what is included in MaxFilings Limited Liability Company Kit.

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10. What is a federal employer identification number (EIN)?

Every LLC is required to have a federal tax identification number, also known as an employer identification number (EIN). This is used to identify the business in any number of transactions. An EIN is obtained by submitting IRS Form SS-4 to the Internal Revenue Service. Your EIN will be needed to open a business bank account.

At MaxFilings, we can prepare this form for you and send it to you to sign (required). Then, we'll mail it to the IRS in the pre-addressed envelope we provide.

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11. How do I name my LLC business?

The name you choose for your business must be unique and cannot already be in use by another company or business in your state. You also need to check to make sure the name is patented. (See these 5 Tips for Naming Your Business)

In all states, the designation “LLC” (or some approved variation) must be added to your business name to distinguish it as a limited liability company.

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12. How do I start forming an LLC?

It couldn't be easier. Get started now by entering the information required to prepare and file the articles of organization in the state you select.

Don't have all the information now? Afraid you won't have time to finish? Don't worry. You can work on it now, save what you enter under your user name, and come back to later to add or change information.

You're under no obligation to pay until you're ready to file.

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